Some pensioners face sudden falls of up to 55pc in their income because they
decided not to buy an annuity when they cashed in their pension pot.

Instead, they opted for "income drawdown", which allows them to keep their original pension investments and take an income from them. But the maximum income allowed from these schemes has fallen drastically as it is tied to returns on government bonds or gilts.

Gilt yields have tumbled in recent years because nervous savers see them as a safe haven during the eurozone crisis. But drawdown pensioners have also been hit by poor investment performance as stock markets have struggled, as well as a rule change that has cut their income further still.

The maximum income that drawdown investors can take from their pension is based on a benchmark gilt rate called the GAD rate, which is set by the Government Actuary's Department. Five years ago this rate peaked at 5.25pc, but has since fallen to 2.5pc – a decline of 52pc.

Pensioners who took out a drawdown plan five years ago must have it reviewed now. At the review, their maximum income will be recalculated. The exact fall in this maximum figure will depend on investment returns, but some investors could see their income more than halved, according to MGM Advantage, the retirement income specialist.

The company calculated that pensioners whose funds had grown by 1pc would suffer a 55pc cut in income, while 3pc returns would result in a 49pc fall. Even an investor whose funds had achieved 7pc returns after charges would see income fall by 35pc.

For example, a 62-year-old man who invested £100,000 in income drawdown in July 2007 would initially have been allowed to take up to £8,640 a year as income, based on the GAD rate at the time. Now, assuming that his funds grew by 1pc, his maximum income will fall to £3,923 following his drawdown review. If he had bought an annuity at the outset, his income would have been fixed for life.

MGM, a 160-year-old mutual, said he could increase his income by abandoning drawdown and switching to an "flexible" annuity. An MGM "flexible" annuity would pay £4,909, while an "enhanced" flexible annuity – for those whose life expectancy is shortened by a medical condition – would pay £6,038.

Andrew Tully of MGM Advantage said: "Customers face the prospect of dealing with a huge hit on their income. Those reaching reviews soon are likely to be the worst hit, as drawdown gilt yields peaked in July 2007.

"Gilt yields are at historic lows, hitting 2.5pc in May, owing to the financial crisis and the impacts of quantitative easing. They are likely to remain low until there is a resolution to the eurozone issue."

He added: "As people in drawdown are getting older there are a host of viable exit strategies. It may make sense to continue in drawdown, but it may also make sense to consider the newer options on the market including investment-linked annuities, which offer certain guarantees and enhanced rates for those with medical or lifestyle conditions.

"People should not feel trapped in drawdown, as other options are available, but seeking professional financial advice is critical."